10-Q 1 mur-20150630x10q.htm 10-Q 10Q June 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

 

 

 

FORM 10-Q

 

 

 

 

 

 

 

(Mark one)

 

 

 

 

 

 

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

       ACT OF 1934

 

 

 

 

 

 

 

For the quarterly period ended June 30, 2015

 

 

 

 

 

 

 

OR

 

 

 

 

 

 

 

[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

       ACT OF 1934

 

 

 

 

 

 

 

For the transition period from ________ to ________

Commission File Number 1-8590

 

 

 

 

 

 

 

MURPHY OIL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Delaware

 

 

71-0361522

 

(State or other jurisdiction of

 

 

(I.R.S. Employer

 

incorporation or organization)

 

 

Identification Number)

 

 

 

 

 

 

 

 

200 Peach Street

 

 

71730-7000

P.O. Box 7000, El Dorado, Arkansas

 

(Zip Code)

(Address of principal executive offices)

 

 

 

 

 

 

 

 

 

 

(870) 862-6411

(Registrant's telephone number, including area code)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
[X] Yes    [  ] No

 

 

 

 

 

 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
[X] Yes    [  ] No 

 

 

 

 

 

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange act.

 

 

 

 

 

 

 

Large accelerated filer [X]                       Accelerated filer [  ]                       Non-accelerated filer [  ]                       Smaller reporting company [  ]

 

 

 

 

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
[  ] Yes    [X] No 

Number of shares of Common Stock, $1.00 par value, outstanding at June 30, 2015 was 172,751,942.

 

 

 

 

 

 

 


 

MURPHY OIL CORPORATION

 

TABLE OF CONTENTS

 

 

1


 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED BALANCE SHEETS (unaudited)

(Thousands of dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

2015

 

2014*

ASSETS

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

909,268 

 

 

1,193,308 

Canadian government securities with maturities greater than 90 days at
   the date of acquisition

 

 

395,544 

 

 

461,313 

Accounts receivable, less allowance for doubtful accounts of $1,605 in 
   2015 and $1,609 in 2014

 

 

542,417 

 

 

873,277 

Inventories, at lower of cost or market

 

 

 

 

 

 

Crude oil

 

 

42,441 

 

 

51,757 

Materials and supplies

 

 

166,866 

 

 

190,976 

Prepaid expenses

 

 

114,547 

 

 

77,281 

Deferred income taxes

 

 

48,551 

 

 

55,107 

Assets held for sale

 

 

279,799 

 

 

376,130 

Total current assets

 

 

2,499,433 

 

 

3,279,149 

Property, plant and equipment, at cost less accumulated depreciation,
   depletion and amortization of $9,070,951 in 2015 and $9,503,524 in 2014

 

 

12,577,749 

 

 

13,331,047 

Deferred charges and other assets

 

 

72,768 

 

 

62,582 

Assets held for sale

 

 

14 

 

 

50,960 

Total assets

 

$

15,149,964 

 

 

16,723,738 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Current maturities of long-term debt

 

$

14,942 

 

 

465,388 

Accounts payable and accrued liabilities

 

 

1,715,599 

 

 

2,471,897 

Income taxes payable

 

 

19,913 

 

 

59,054 

Liabilities associated with assets held for sale

 

 

56,334 

 

 

151,548 

Total current liabilities

 

 

1,806,788 

 

 

3,147,887 

Long-term debt, including capital lease obligation

 

 

3,264,868 

 

 

2,517,669 

Deferred income taxes

 

 

937,745 

 

 

1,193,864 

Asset retirement obligations

 

 

844,481 

 

 

841,526 

Deferred credits and other liabilities

 

 

429,485 

 

 

441,048 

Liabilities associated with assets held for sale

 

 

551 

 

 

8,310 

Stockholders’ equity

 

 

 

 

 

 

Cumulative Preferred Stock, par $100, authorized 400,000 shares,
   none issued

 

 

– 

 

 

– 

Common Stock, par $1.00, authorized 450,000,000 shares, issued
   195,055,724 shares in 2015 and 195,040,149 shares in 2014

 

 

195,056 

 

 

195,040 

Capital in excess of par value

 

 

892,553 

 

 

906,741 

Retained earnings

 

 

8,515,176 

 

 

8,728,032 

Accumulated other comprehensive loss

 

 

(429,917)

 

 

(170,255)

Treasury stock, 22,303,782 shares of Common Stock in 2015 and
   17,540,636 shares of Common Stock in 2014, at cost

 

 

(1,306,822)

 

 

(1,086,124)

Total stockholders’ equity

 

 

7,866,046 

 

 

8,573,434 

Total liabilities and stockholders’ equity

 

$

15,149,964 

 

 

16,723,738 

 

*Reclassified to conform to current presentation.

 

See Notes to Consolidated Financial Statements, page 7.

 

The Exhibit Index is on page 34.

2


 

 

 

Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(Thousands of dollars, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

2015

 

2014

 

2015

 

2014

REVENUES

 

 

 

 

 

 

 

 

Sales and other operating revenues

$

718,621 

 

1,357,905 

 

1,467,771 

 

2,639,113 

Gain (loss) on sale of assets

 

18,246 

 

 –

 

154,123 

 

(4,997)

Interest and other income (loss)

 

1,423 

 

(8,884)

 

38,143 

 

1,305 

              Total revenues

 

738,290 

 

1,349,021 

 

1,660,037 

 

2,635,421 

COSTS AND EXPENSES

 

 

 

 

 

 

 

 

Lease operating expenses

 

227,489 

 

285,865 

 

459,910 

 

548,120 

Severance and ad valorem taxes

 

19,043 

 

28,893 

 

39,834 

 

55,219 

Exploration expenses, including undeveloped lease amortization

 

64,959 

 

134,812 

 

193,693 

 

273,278 

Selling and general expenses

 

79,176 

 

95,000 

 

166,143 

 

187,026 

Depreciation, depletion and amortization

 

403,390 

 

458,993 

 

884,417 

 

855,242 

Accretion of asset retirement obligations

 

11,750 

 

12,327 

 

23,519 

 

24,392 

Interest expense

 

30,466 

 

33,769 

 

59,936 

 

66,655 

Interest capitalized

 

(1,823)

 

(5,053)

 

(3,208)

 

(13,921)

Other expense

 

13,931 

 

(178)

 

63,612 

 

636 

              Total costs and expenses

 

848,381 

 

1,044,428 

 

1,887,856 

 

1,996,647 

Income (loss) from continuing operations before income taxes

 

(110,091)

 

304,593 

 

(227,819)

 

638,774 

Income tax expense (benefit)

 

(21,105)

 

161,925 

 

(142,363)

 

326,820 

Income (loss) from continuing operations

 

(88,986)

 

142,668 

 

(85,456)

 

311,954 

Income (loss) from discontinued operations, net

 

15,152 

 

(13,256)

 

(2,819)

 

(27,289)

NET INCOME (LOSS)

$

(73,834)

 

129,412 

 

(88,275)

 

284,665 

PER COMMON SHARE – BASIC

 

 

 

 

 

 

 

 

        Income (loss) from continuing operations

$

(0.51)

 

0.80 

 

(0.48)

 

1.73 

        Loss from discontinued operations

 

0.09 

 

(0.08)

 

(0.02)

 

(0.15)

        Net income (loss)

$

(0.42)

 

0.72 

 

(0.50)

 

1.58 

PER COMMON SHARE – DILUTED

 

 

 

 

 

 

 

 

        Income (loss) from continuing operations

$

(0.51)

 

0.79 

 

(0.48)

 

1.72 

        Loss from discontinued operations

 

0.09 

 

(0.07)

 

(0.02)

 

(0.15)

        Net income (loss)

$

(0.42)

 

0.72 

 

(0.50)

 

1.57 

 

 

 

 

 

 

 

 

 

Average Common shares outstanding

 

 

 

 

 

 

 

 

        Basic

 

174,488,842 

 

178,500,440 

 

176,343,309 

 

180,003,605 

        Diluted

 

174,488,842 

 

180,045,020 

 

176,343,309 

 

181,327,914 

 

See Notes to Consolidated Financial Statements, page 7.

3


 

 

Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

(Thousands of dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

Net income (loss)

$

(73,834)

 

129,412 

 

(88,275)

 

284,665 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

        Net income (loss) from foreign currency translation

 

31,981 

 

133,559 

 

(266,614)

 

(3,045)

        Retirement and postretirement benefit plans

 

2,695 

 

1,026 

 

5,989 

 

2,491 

        Deferred loss on interest rate hedges reclassified
          to interest expense

 

481 

 

483 

 

963 

 

966 

              Other comprehensive income (loss)

 

35,157 

 

135,068 

 

(259,662)

 

412 

COMPREHENSIVE INCOME (LOSS)

$

(38,677)

 

264,480 

 

(347,937)

 

285,077 

 

See Notes to Consolidated Financial Statements, page 7.

 

4


 

 

Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(Thousands of dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

June 30,

 

2015

 

2014

OPERATING ACTIVITIES

 

 

 

 

Net income (loss)

$

(88,275)

 

284,665 

Adjustments to reconcile net income (loss) to net cash provided by continuing 
  operations activities:

 

 

 

 

      Loss from discontinued operations

 

2,819 

 

27,289 

      Depreciation, depletion and amortization

 

884,417 

 

855,242 

      Amortization of deferred major repair costs

 

3,404 

 

4,313 

      Dry hole costs

 

99,023 

 

127,827 

      Amortization of undeveloped leases

 

45,825 

 

37,764 

      Accretion of asset retirement obligations

 

23,519 

 

24,392 

      Deferred and noncurrent income tax charges (benefits)

 

(194,240)

 

18,122 

      Pretax (gains) losses from disposition of assets

 

(154,123)

 

4,997 

      Net decrease in noncash operating working capital

 

107,171 

 

48,449 

      Other operating activities, net

 

(14,329)

 

22,106 

            Net cash provided by continuing operations activities

 

715,211 

 

1,455,166 

INVESTING ACTIVITIES

 

 

 

 

Property additions and dry hole costs

 

(1,433,615)

 

(1,840,544)

Proceeds from sales of property, plant and equipment

 

423,106 

 

3,089 

Purchase of investment securities*

 

(629,763)

 

(372,861)

Proceeds from maturity of investment securities*

 

663,343 

 

320,331 

Other investing activities, net

 

(20,568)

 

(13,007)

             Net cash required by investing activities

 

(997,497)

 

(1,902,992)

FINANCING ACTIVITIES

 

 

 

 

Borrowings of debt

 

823,000 

 

850,000 

Repayments of debt

 

(450,000)

 

– 

Repayment of capital lease obligation

 

(4,703)

 

– 

Purchase of treasury stock

 

(250,000)

 

(375,000)

Withholding tax on stock-based incentive awards

 

(8,976)

 

(6,784)

Cash dividends paid

 

(124,581)

 

(112,126)

Other financing activities, net

 

(152)

 

(1,224)

             Net cash provided (required) by financing activities

 

(15,412)

 

354,866 

CASH FLOWS FROM DISCONTINUED OPERATIONS

 

 

 

 

Operating activities

 

(85,445)

 

4,517 

Investing activities

 

5,322 

 

(9,092)

Changes in cash included in current assets held for sale

 

89,226 

 

– 

             Net increase (decrease) in cash and cash equivalents of discontinued operations

 

9,103 

 

(4,575)

Effect of exchange rate changes on cash and cash equivalents

 

4,555 

 

8,466 

Net decrease in cash and cash equivalents

 

(284,040)

 

(89,069)

Cash and cash equivalents at January 1

 

1,193,308 

 

750,155 

Cash and cash equivalents at June 30

$

909,268 

 

661,086 

 

*Investments are Canadian government securities with maturities greater than 90 days at the date of acquisition.

 

See Notes to Consolidated Financial Statements, page 7.

5


 

 

 

Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)

(Thousands of dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

June 30,

 

2015

 

2014

Cumulative Preferred Stock – par $100, authorized 400,000 shares,
   none issued

$

– 

 

 

– 

Common Stock – par $1.00, authorized 450,000,000 shares,
   issued 195,055,724 shares at June 30, 2015 and
   195,017,103 shares at June 30, 2014

 

 

 

 

 

Balance at beginning of period

 

195,040 

 

 

194,920 

Exercise of stock options

 

16 

 

 

97 

Balance at end of period

 

195,056 

 

 

195,017 

Capital in Excess of Par Value

 

 

 

 

 

Balance at beginning of period

 

906,741 

 

 

902,633 

Exercise of stock options, including income tax benefits

 

(376)

 

 

(11,232)

Restricted stock transactions and other

 

(38,032)

 

 

(27,970)

Stock-based compensation

 

24,285 

 

 

22,884 

Other

 

(65)

 

 

(23)

Balance at end of period

 

892,553 

 

 

886,292 

Retained Earnings

 

 

 

 

 

Balance at beginning of period

 

8,728,032 

 

 

8,058,792 

Net income (loss) for the period

 

(88,275)

 

 

284,665 

Cash dividends

 

(124,581)

 

 

(112,126)

Balance at end of period

 

8,515,176 

 

 

8,231,331 

Accumulated Other Comprehensive Income (Loss)

 

 

 

 

 

Balance at beginning of period

 

(170,255)

 

 

172,119 

Foreign currency translation loss, net of income taxes

 

(266,614)

 

 

(3,045)

Retirement and postretirement benefit plans, net of income taxes

 

5,989 

 

 

2,491 

Deferred loss on interest rate hedges reclassified to interest expense,
   net of income taxes

 

963 

 

 

966 

Balance at end of period

 

(429,917)

 

 

172,531 

Treasury Stock

 

 

 

 

 

Balance at beginning of period

 

(1,086,124)

 

 

(732,734)

Purchase of treasury shares

 

(250,000)

 

 

(375,000)

Sale of stock under employee stock purchase plans

 

246 

 

 

275 

Awarded restricted stock, net of forfeitures

 

29,056 

 

 

21,185 

Balance at end of period

 

(1,306,822)

 

 

(1,086,274)

Total Stockholders’ Equity

$

7,866,046 

 

 

8,398,897 

 

See Notes to Consolidated Financial Statements, page 7.

6


 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

These notes are an integral part of the financial statements of Murphy Oil Corporation and Consolidated Subsidiaries (Murphy/the Company) on pages 2 through 6 of this Form 10-Q report.

 

Note A – Nature of Business and Interim Financial Statements

 

NATURE OF BUSINESS – Murphy Oil Corporation is an international oil and gas company that conducts its business through various operating subsidiaries.  The Company produces oil and natural gas in the United States, Canada and Malaysia and conducts oil and natural gas exploration activities worldwide.  The Company has an interest in a Canadian synthetic oil operation.

 

INTERIM FINANCIAL STATEMENTS – In the opinion of Murphy's management, the unaudited financial statements presented herein include all accruals necessary to present fairly the Company's financial position at June  30, 2015 and December 31, 2014, and the results of operations,  cash flows and changes in stockholders’ equity for the interim periods ended June  30, 2015 and 2014, in conformity with accounting principles generally accepted in the United States of America (U.S.).  In preparing the financial statements of the Company in conformity with accounting principles generally accepted in the U.S., management has made a number of estimates and assumptions related to the reporting of assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities.  Actual results may differ from the estimates.

 

Financial statements and notes to consolidated financial statements included in this Form 10-Q report should be read in conjunction with the Company's 2014 Form 10-K report, as certain notes and other pertinent information have been abbreviated or omitted in this report.  Financial results for the six-month period ended June 30, 2015 are not necessarily indicative of future results.

 

 

Note B – Property, Plant and Equipment

 

Under U.S. generally accepted accounting principles for companies that use the successful efforts method of accounting, exploratory well costs should continue to be capitalized when the well has found a sufficient quantity of reserves to justify its completion as a producing well and the company is making sufficient progress assessing the reserves and the economic and operating viability of the project.

 

At June  30, 2015, the Company had total capitalized exploratory well costs pending the determination of proved reserves of $122.1 million.  The following table reflects the net changes in capitalized exploratory well costs during the six-month periods ended June  30, 2015 and 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Thousands of dollars)

2015

 

 

2014

Beginning balance at January 1

$

120,455 

 

 

393,030 

Additions pending the determination of proved reserves

 

1,620 

 

 

3,376 

Reclassifications to proved properties based on the determination of proved reserves

 

– 

 

 

– 

Capitalized exploratory well costs charged to expense

 

– 

 

 

– 

Balance at June 30

$

122,075 

 

 

396,406 

 

The following table provides an aging of capitalized exploratory well costs based on the date the drilling was completed for each individual well and the number of projects for which exploratory well costs have been capitalized.  The projects are aged based on the last well drilled in the project.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

2015

 

2014

(Thousands of dollars)

Amount

 

No. of Wells

 

No. of Projects

 

Amount

 

No. of Wells

 

No. of Projects

Aging of capitalized well costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

Zero to one year

$

217 

 

 

 

$

32,192 

 

 

One to two years

 

32,192 

 

 

 

 

50,333 

 

 

Two to three years

 

27,842 

 

 

– 

 

 

37,969 

 

 

– 

Three years or more

 

61,824 

 

 

 

 

275,912 

 

22 

 

 

$

122,075 

 

10 

 

 

$

396,406 

 

32 

 

 

7


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note B – Property, Plant and Equipment (Contd.)

 

Of the $121.9 million of exploratory well costs capitalized more than one year at June  30, 2015, $55.9 million is in the U.S. and $66.0 million is in Brunei.  In both geographical areas, either further appraisal or development drilling is planned and/or development studies/plans are in various stages of completion.

 

During the first quarter 2015, the Company completed the second phase of the sale of 30% of its oil and gas assets in Malaysia and received net cash proceeds of $417.2 million.  The Company recorded an after-tax gain on this sale of $199.5 million.  Combined net cash proceeds received to date from the 30% sale, subject to final adjustments, totaled $1.88 billion.

 

See also Note E for discussion regarding a capital lease of production equipment at the Kakap field.

 

 

Note C – Inventories

 

Inventories are carried at the lower of cost or market.  For the Company’s U.K. refining and marketing operations reported as discontinued operations, the cost of crude oil and finished products was predominantly determined on the last-in, first-out (LIFO) method.  The sale of the U.K. refining and marketing operations was completed in June 2015 and all inventories reported under the LIFO method were included in the sale.  At December 31, 2014, the carrying value of inventories under the LIFO method was $44.9 million less than such inventories would have been valued using the first-in, first-out (FIFO) method.  These inventories are included in current assets held for sale on the Consolidated Balance Sheet.

 

 

Note D – Discontinued Operations

 

The Company has accounted for its U.K. refining and marketing operations as discontinued operations for all periods presented.  The Company completed its agreement to sell the remaining U.K. downstream assets at the end of the second quarter.  The 2015 second quarter includes an adjustment to the impairment previously recognized as a result of the final sale of the U.K. downstream assets.

 

The results of operations associated with these discontinued operations for the three-month and six-month periods ended June 30, 2015 and 2014 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

(Thousands of dollars)

 

2015

 

2014

 

2015

 

2014

Revenues

$

153,107 

 

811,134 

 

382,496 

 

2,243,520 

Income (loss) before income taxes

$

21,046 

 

(16,938)

 

337 

 

(34,233)

Income tax expense (benefit)

 

5,894 

 

(3,682)

 

3,156 

 

(6,944)

Income (loss) from discontinued operations

$

15,152 

 

(13,256)

 

(2,819)

 

(27,289)

 

8


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note D – Discontinued Operations (Contd.)

 

The following table presents the carrying value of the major categories of assets and liabilities of U.K. refining and marketing operations reflected as held for sale on the Company’s Consolidated Balance Sheets at June 30, 2015 and December 31, 2014.  

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

(Thousands of dollars)

2015

 

2014

Current assets

 

 

 

 

Cash

$

111,286 

 

200,512 

Accounts receivable

 

146,651 

 

97,568 

Inventories

 

325 

 

42,161 

Other

 

21,537 

 

35,889 

Total current assets held for sale

$

279,799 

 

376,130 

Non-current assets

 

 

 

 

Property, plant and equipment, net

$

– 

 

50,947 

Other

 

14 

 

13 

Total non-current assets held for sale

$

14 

 

50,960 

Current liabilities

 

 

 

 

Accounts payable

$

7,897 

 

59,023 

Other accrued taxes payable

 

31,519 

 

40,653 

Accrued compensation and severance

 

16,320 

 

30,872 

Refinery decommissioning cost

 

598 

 

21,000 

Total current liabilities associated with assets held for sale

$

56,334 

 

151,548 

Non-current liabilities

 

 

 

 

Deferred income taxes payable

$

– 

 

3,873 

Deferred credits and other liabilities

 

551 

 

4,437 

Total non-current liabilities associated with assets held for sale

$

551 

 

8,310 

 

 

 

 

Note E – Financing Arrangements and Debt

 

The Company has a $2.0 billion committed credit facility that expires in June 2017.  Borrowings under the facility bear interest at 1.25% above LIBOR based on the Company’s current credit rating as of June 30, 2015.  In addition, facility fees of 0.25% are charged on the full $2.0 billion commitment.  The Company also had unused uncommitted credit facilities that totaled approximately $315.3 million at June  30, 2015.  These uncommitted facilities may be withdrawn by the various banks at any time.  The Company also has a shelf registration statement on file with the U.S. Securities and Exchange Commission that permits the offer and sale of debt and/or equity securities through October 2015.

 

The Company and its partners are parties to a  25-year lease of production equipment at the Kakap field offshore Malaysia.  The lease has been accounted for as a capital lease, and payments under the agreement are to be made over a 15-year period through June 2028.  Current maturities and long-term debt on the Consolidated Balance Sheet included $14.9 million and $213.2 million, respectively, associated with this lease at June  30, 2015.

 

 

9


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note F – Cash Flow Disclosures

 

Additional disclosures regarding cash flow activities are provided below.

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

(Thousands of dollars)

2015

 

2014

Net (increase) decrease in operating working capital other than
   cash and cash equivalents:

 

 

 

 

Decrease (increase) in accounts receivable

$

284,542 

 

(53,133)

Decrease (increase) in inventories

 

(25,547)

 

5,574 

Increase in prepaid expenses

 

(40,191)

 

(41,191)

Decrease in deferred income tax assets

 

5,092 

 

1,895 

Increase (decrease) in accounts payable and accrued liabilities

 

(84,781)

 

55,729 

Increase (decrease) in current income tax liabilities

 

(31,944)

 

79,575 

Total

$

107,171 

 

48,449 

Supplementary disclosures (including discontinued operations):

 

 

 

 

Cash income taxes paid, net of refunds

$

90,419 

 

234,071 

Interest paid, net of amounts capitalized

 

55,658 

 

41,922 

Non-cash investing activities, related to continuing operations:

 

 

 

 

Asset retirement costs capitalized

$

6,703 

 

12,985 

Decrease in capital expenditure accrual

 

336,952 

 

96,479 

 

 

 

 

 

10


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note G – Employee and Retiree Benefit Plans

 

The Company has defined benefit pension plans that are principally noncontributory and cover most full-time employees.  All pension plans are funded except for the U.S. and Canadian nonqualified supplemental plans and the U.S. directors’ plan.  All U.S. tax qualified plans meet the funding requirements of federal laws and regulations.  Contributions to foreign plans are based on local laws and tax regulations.  The Company also sponsors health care and life insurance benefit plans, which are not funded, that cover most active and retired U.S. employees.  Additionally, most U.S. retired employees are covered by a life insurance benefit plan.  The health care benefits are contributory; the life insurance benefits are noncontributory.

 

The table that follows provides the components of net periodic benefit expense for the three-month and six-month periods ended June  30, 2015 and 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Pension Benefits

 

Other Postretirement Benefits

(Thousands of dollars)

2015

 

 

2014

 

2015

 

2014

Service cost

$

4,772 

 

 

6,284 

 

 

828 

 

 

672 

Interest cost

 

7,971 

 

 

8,253 

 

 

1,192 

 

 

1,277 

Expected return on plan assets

 

(8,724)

 

 

(8,528)

 

 

– 

 

 

– 

Amortization of prior service cost

 

198 

 

 

228 

 

 

(20)

 

 

(20)

Amortization of transitional asset

 

274 

 

 

212 

 

 

 

 

Recognized actuarial loss

 

3,891 

 

 

1,733 

 

 

190 

 

 

59 

 

 

8,382 

 

 

8,182 

 

 

2,193 

 

 

1,990 

Special termination benefits

 

8,606 

 

 

– 

 

 

– 

 

 

– 

Curtailments

 

306 

 

 

– 

 

 

– 

 

 

– 

Net periodic benefit expense

$

17,294 

 

 

8,182 

 

 

2,193 

 

 

1,990 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

Pension Benefits

 

Other Postretirement Benefits

(Thousands of dollars)

 

2015

 

 

2014

 

2015

 

2014

Service cost

$

9,853 

 

 

12,840 

 

 

1,656 

 

 

1,344 

Interest cost

 

15,921 

 

 

16,468 

 

 

2,384 

 

 

2,555 

Expected return on plan assets

 

(17,411)

 

 

(17,008)

 

 

– 

 

 

– 

Amortization of prior service cost

 

393 

 

 

453 

 

 

(41)

 

 

(41)

Amortization of transitional asset

 

545 

 

 

420 

 

 

 

 

Recognized actuarial loss

 

7,782 

 

 

3,466 

 

 

385 

 

 

118 

 

 

17,083 

 

 

16,639 

 

 

4,387 

 

 

3,979 

Special termination benefits

 

8,606 

 

 

– 

 

 

– 

 

 

– 

Curtailments

 

306 

 

 

– 

 

 

– 

 

 

– 

Net periodic benefit expense

$

25,995 

 

 

16,639 

 

 

4,387 

 

 

3,979 

 

Termination and curtailment expenses shown in the table above relate to restructuring activities in the U.S. undertaken by the Company in the second quarter 2015.

 

During the six-month period ended June 30, 2015, the Company made contributions of $30.1 million to its defined benefit pension and postretirement benefit plans.  Remaining required funding in 2015 for the Company’s defined benefit pension and postretirement plans is anticipated to be $6.1 million.

 

 

11


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note H – Incentive Plans

 

The costs resulting from all share-based payment transactions are recognized as an expense in the Consolidated Statements of Income using a fair value-based measurement method over the periods that the awards vest.

 

The 2012 Annual Incentive Plan (2012 Annual Plan) authorizes the Executive Compensation Committee (the Committee) to establish specific performance goals associated with annual cash awards that may be earned by officers, executives and other key employees.  Cash awards under the 2012 Annual Plan are determined based on the Company’s actual financial and operating results as measured against the performance goals established by the Committee.  The 2012 Long-Term Incentive Plan (2012 Long-Term Plan) authorizes the Committee to make grants of the Company’s Common Stock and other stock-based incentives to employees.  These grants may be in the form of stock options (nonqualified or incentive), stock appreciation rights (SAR), restricted stock, restricted stock units (RSU), performance units, performance shares, dividend equivalents and other stock-based incentives.  The 2012 Long-Term Plan expires in 2022.  A total of 8,700,000 shares are issuable during the life of the 2012 Long-Term Plan, with annual grants limited to 1% of Common shares outstanding.  The Company has an Employee Stock Purchase Plan that permits the issuance of up to 980,000 shares through September 30, 2017.  The Company also has a Stock Plan for Non-Employee Directors that permits the issuance of restricted stock and stock options or a combination thereof to the Company’s Directors.

 

In February 2015, the Committee granted stock options for 991,000 shares at an exercise price of either $49.65 or $51.63 per share.  The Black-Scholes valuation for these awards was $10.97 per option.  The Committee also granted 455,000 performance-based RSU and 233,400 time-based RSU in February.  The fair value of the performance-based RSU, using a Monte Carlo valuation model, ranged from $44.03 to $48.12 per unit.  The fair value of time-based RSU was estimated based on the fair market value of the Company’s stock on the date of grant, which was $49.65 per share.  Additionally, the Committee granted 847,400 SAR and 616,790 units of cash-settled RSU (RSU-C) to certain employees.  The SAR and

RSU-C are to be settled in cash, net of applicable income taxes, and are accounted for as liability-type awards.  The initial fair value of these SAR was equivalent to the stock options granted, while the initial value of RSU-C was equivalent to equity-settled restricted stock units granted.  Also in February, the Committee granted 48,665 shares of time-based RSU to the Company’s Directors under the Non-employee Director Plan.  These shares vest on the third anniversary of the date of grant. The estimated fair value of these awards ranged between $49.09 and $50.90 per unit on date of grant.

 

Beginning January 1, 2014, all stock option exercises are non-cash transactions for the Company.  The employee will receive net shares, after applicable statutory withholding taxes, upon each exercise.  The actual income tax benefit realized for the tax deductions from option exercises of the share-based payment arrangements totaled $3.1 million for the six-month period ended June  30, 2014No income tax benefit was realized from option exercises for the six-month period ended June  30, 2015.

 

Amounts recognized in the financial statements with respect to share-based plans are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

June 30,

(Thousands of dollars)

2015

 

2014

Compensation charged against income before tax benefit

$

31,230 

 

 

32,142 

Related income tax benefit recognized in income

 

9,691 

 

 

9,978 

 

 

 

12


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note I – Earnings per Share

 

Net income (loss) was used as the numerator in computing both basic and diluted income per Common share for the

three-month and six-month periods ended June  30, 2015 and 2014.  The following table reconciles the weighted-average shares outstanding used for these computations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

(Weighted-average shares)

2015

 

2014

 

2015

 

2014

Basic method

174,488,842 

 

178,500,440 

 

176,343,309 

 

180,003,605 

Dilutive stock options and restricted stock units*

– 

 

1,544,580 

 

– 

 

1,324,309 

   Diluted method

174,488,842 

 

180,045,020 

 

176,343,309 

 

181,327,914 

 

*Due to a net loss recognized by the Company for the three-month and six-month periods ended June 30, 2015, no unvested stock awards were included in computing earnings per share because the effect was anti-dilutive.

 

The following table reflects certain options to purchase shares of common stock that were outstanding during the 2015 and 2014 periods but were not included in the computation of diluted earnings per share because the incremental shares from assumed conversion were antidilutive.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2015

 

2014

 

2015

 

2014

Antidilutive stock options excluded from diluted shares

 

5,988,668 

 

 

1,161,442 

 

 

5,767,975 

 

 

1,810,012 

Weighted average price of these options

$

53.12 

 

$

60.02 

 

$

53.31 

 

$

58.90 

 

 

 

Note J – Income Taxes

 

The Company’s effective income tax rate generally exceeds the statutory U.S. tax rate of 35%.  The effective tax rate is calculated as the amount of income tax expense divided by income before income tax expense.  For the three-month and six-month periods in 2015 and 2014, the Company’s effective income tax rates were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

2014

 

Three months ended June 30

19.2 

%

 

53.2 

%

Six months ended June 30

62.5 

%

 

51.2 

%

 

The effective tax rates for most periods generally exceed the U.S. statutory tax rate of 35% due to several factors, including:  the effects of income generated in foreign tax jurisdictions, certain of which have income tax rates that are higher than the U.S. Federal rate; U.S. state tax expense; and certain expenses, including exploration and other expenses in certain foreign jurisdictions, for which no income tax benefits are available or are not presently being recorded due to a lack of reasonable certainty of adequate future revenue against which to utilize these expenses as deductions.  The effective tax rate for the three month period ended June 30, 2015 was less than the U.S. statutory tax rate primarily due to a deferred tax expense associated with the increase in the statutory tax rate in Alberta.  The effective tax rate for the six-month period ended June  30, 2015 was above the U.S. statutory tax rate primarily due to  a deferred tax benefit associated with the sale of Malaysian assets partially offset by other expenses in foreign jurisdictions for which no tax benefits were recognized and the increase in statutory rate in Alberta.  The effective tax rate for the three and six-month periods ended June  30, 2014 was above the U.S. statutory tax rate, primarily due to other expenses in certain foreign jurisdictions for which no tax benefits were recognized.

 

The Company’s tax returns in multiple jurisdictions are subject to audit by taxing authorities.  These audits often take years to complete and settle.  Although the Company believes that recorded liabilities for unsettled issues are adequate, additional gains or losses could occur in future years from resolution of outstanding unsettled matters.  As of June  30, 2015, the earliest years remaining open for audit and/or settlement in our major taxing jurisdictions are as follows:  United States – 2011; Canada – 2008; Malaysia – 2007; and United Kingdom – 2012.

 

 

13


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note K – Financial Instruments and Risk Management

 

Murphy often uses derivative instruments to manage certain risks related to commodity prices, foreign currency exchange rates and interest rates.  The use of derivative instruments for risk management is covered by operating policies and is closely monitored by the Company’s senior management.  The Company does not hold any derivatives for speculative purposes and it does not use derivatives with leveraged or complex features.  Derivative instruments are traded primarily with creditworthy major financial institutions or over national exchanges, such as the New York Mercantile Exchange (NYMEX).  The Company has a risk management control system to monitor commodity price risks and any derivatives obtained to manage a portion of such risks.  For accounting purposes, the Company has not designated commodity and foreign currency derivative contracts as hedges, and therefore, it recognizes all gains and losses on these derivative contracts in its Consolidated Statements of Income.  Certain interest rate derivative contracts were accounted for as hedges and the net payment upon settlement recording the fair value of these contracts was deferred in Accumulated Other Comprehensive Income (Loss).  This deferred cost is being reclassified to Interest Expense in the Consolidated Statements of Income over the period until the associated notes mature in 2022.

 

Commodity Purchase Price Risks 

The Company is subject to commodity price risk related to crude oil, natural gas liquids and natural gas it produces and sells.  The Company had open derivative contracts at June 30,  2015 and 2014.  The impact from marking to market these commodity derivative contracts increased revenue by $7.4 million for the six-month period ended June  30, 2015 but reduced revenue by $36.9 million for the same period in 2014.    Open West Texas Intermediate contracts for each period were as follows:

 

 

 

 

 

 

 

 

 

 

 

Volumes

 

 

 

(barrels per day)

 

Swap Prices

  At June 30, 2015

 

 

 

      July - September 2015

15,000 

 

$62.84 per barrel

      October - December 2015

15,000 

 

$63.30 per barrel

 

 

 

 

  At June 30, 2014

 

 

 

      July - September 2014

26,000 

 

$94.89 per barrel

      October - December 2014

16,000 

 

$92.33 per barrel

 

Foreign Currency Exchange Risks

The Company is subject to foreign currency exchange risk associated with operations in countries outside the U.S.  Short-term derivative instrument contracts totaling $8.0 million and $33.0 million U.S. dollars were also outstanding at June 30, 2015 and 2014, respectively, to manage the risk of certain U.S. dollar accounts receivable associated with sale of crude oil production in Canada.  The impact from marking to market these foreign currency derivative contracts increased income before taxes by $11 thousand and $0.7 million for the six-month periods ended June 30, 2015 and 2014, respectively.

 

 

14


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note K – Financial Instruments and Risk Management (Contd.)

 

At June 30, 2015 and December 31, 2014, the fair value of derivative instruments not designated as hedging instruments are presented in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

December 31, 2014

(Thousands of dollars)

 

Asset (Liability) Derivatives

 

Asset (Liability) Derivatives

Type of Derivative Contract

 

Balance Sheet Location

 

Fair Value

 

Balance Sheet Location

 

Fair Value

Commodity

 

Accounts receivable

 

$

7,419 

 

Accounts receivable

 

$

23,168 

Foreign exchange

 

Accounts payable

 

 

(11)

 

Accounts payable

 

 

(25)

 

 

For the three-month and six-month periods ended June  30, 2015 and 2014, the gains and losses recognized in the Consolidated Statements of Income for derivative instruments not designated as hedging instruments are presented in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss)

 

 

 

 

Three Months Ended

 

Six Months Ended

(Thousands of dollars)

 

Statement of Income

 

June 30,

 

June 30,

Type of Derivative Contract

 

Location

 

 

2015

 

2014

 

2015

 

2014

Commodity

 

Sales and other operating revenues

 

$

7,419 

 

(36,041)

 

7,419 

 

(54,455)

Foreign exchange

 

Interest and other income

 

 

(49)

 

1,464 

 

14 

 

4,900 

 

 

 

 

$

7,370 

 

(34,577)

 

7,433 

 

(49,555)

 

Interest Rate Risks

In 2011 the Company entered into a series of derivative contracts known as forward starting interest rate swaps to manage interest rate risk associated with $350 million of 10-year notes that were sold in May 2012.  These interest rate swaps matured in May 2012.  Under hedge accounting rules, the Company deferred the net cost associated with these contracts to match the payment of interest on these notes through 2022.  During each of the six-month periods ended June  30, 2015 and 2014, $1.5 million of the deferred cost on the interest rate swaps was charged to income as a component of Interest Expense.  The remaining cost deferred on these matured contracts at June  30, 2015 was $13.2 million, which is recorded, net of income taxes of $7.1 million, in Accumulated Other Comprehensive Loss in the Consolidated Balance Sheet.  The Company expects to charge approximately $1.5 million of this deferred cost to income in the form of interest expense during the remaining six months of 2015.

 

The Company carries certain assets and liabilities at fair value in its Consolidated Balance Sheets.  The fair value hierarchy is based on the quality of inputs used to measure fair value, with Level 1 being the highest quality and Level 3 being the lowest quality.  Level 1 inputs are quoted prices in active markets for identical assets or liabilities.  Level 2 inputs are observable inputs other than quoted prices included within Level 1.  Level 3 inputs are unobservable inputs which reflect assumptions about pricing by market participants.

 

The carrying value of assets and liabilities recorded at fair value on a recurring basis at June  30, 2015 and December 31, 2014 are presented in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

December 31, 2014

(Thousands of dollars)

Level 1

 

Level 2

 

Level 3

 

Total

 

Level 1

 

 

Level 2

 

Level 3

 

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Commodity derivative
        contracts

 

– 

 

7,419 

 

– 

 

7,419 

 

– 

 

 

23,168 

 

– 

 

23,168 

 

$

– 

 

7,419 

 

– 

 

7,419